Wall St Week Ahead: Energy price spike adds market risk as earnings arrive

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NEW YORK (Businesshala) – US stock market investors are speculating whether more volatility is ahead due to rising global energy prices, which could drive inflation, shrink profit margins and put pressure on consumer spending. Is.

FILE PHOTO: A street sign is seen for Wall Street outside the New York Stock Exchange (NYSE) in New York City, New York, US, June 28, 2021. Businesshala/Andrew Kelly/File photo

The stock rebounded this week after Monday’s losses, leaving the S&P 500 down 5.2% from its record high hit in September. A ceasefire in the US Congress to avoid loan defaults provided some relief, but investors remain concerned about inflation, high US Treasury yields and the Federal Reserve’s plan to open up its easy money policies.

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Energy costs are a major factor in inflation, and will be an important topic as companies report third-quarter results in the coming weeks. Oil prices have risen more than 25% since late August, with Brent hitting $80 a barrel and a three-year high. Natural gas prices have skyrocketed in Europe, causing panic among political leaders.

According to strategists at Goldman Sachs, oil prices have a “broadly neutral” effect on overall corporate earnings, with every 10% increase in Brent prices that increases S&P 500 earnings per share by 0.3%.

Energy stocks have risen as crude oil prices rose, yet higher prices could still weigh on companies ranging from transportation to consumer discretionary firms.

“We’re going to find out when this piece of the inflation puzzle breaks the camel’s back and really starts cutting margins,” said Art Hogan, chief market strategist at National Securities. “When energy prices rise, the cost of everything goes up.”

Despite September’s volatility, the S&P 500 remains up about 17% so far in 2021. Even as investors swung to buy the market’s latest drop, some Wall Street strategists are pointing to the risks that can come with jumping into equities.

Analysts at Capital Economics said in a note that rising energy prices could put more pressure on bond yields. A jump in yields has affected stocks in recent weeks, especially in tech stocks.

If oil prices continue to move toward $100 a barrel, “the weight could continue to weigh on sentiment,” said Michael Aron, chief investment strategist at State Street Global Advisors.

“If we break down that barrier, I think it will affect how people are predicting economic growth and inflation and interest rates, which has broader implications for sectors and industries and markets,” Aron said. .

With oil rising since late August, the S&P 500 energy sector has gained 25% compared to a 1% decline for the overall index. Energy was the only sector to perform positively in September.

Oil vs US stock market in 2021

The energy sector comprises less than 3% of the S&P 500’s weight, however, and rising oil prices could raise fuel and other costs for companies such as transportation firms, while also driving demand by major consumers to pay more for gas. There is danger. on the pump.

JPMorgan strategists in a note this week outlined a basket of stocks negatively impacted by oil at $100 a barrel, including package delivery company FedEx, discount retailer Dollar Tree and auto parts retailer O’Reilly Automotive.

In a note last week, US economists at Deutsche Bank said a 101 percent increase in gas prices compared to a year ago is expected to dampen incomes that roughly $120 billion would be spent on non-energy items. can.

However, the relative amount of consumer spending on gasoline and other energy expenditures has decreased over the past 40 years, according to data from Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions.

Janasiewicz said the percentage of personal consumption expenditure devoted to gas and other energy spending has fallen from 6% in the early 1980s to 2.35%.

And JP Morgan strategists said markets would be able to digest oil at $130 a barrel, because the economy and consumers were “doing fine” in 2010-15, when oil averaged above $100.

“We do not believe that the current energy price will have a significant negative impact on the economy,” the strategists wrote.

Reporting by Louise Kruskoff; Editing by David Gregorio


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